MARSH BUCKS TREND WITH EXPANSION TO CHICAGO

INDIANAPOLIS -- Marsh Supermarkets' expansion from Indiana to Illinois represents a left turn in more ways than one.When the newest Marsh location opens next week in the Chicago suburb of Naperville, Ill., it will stand in stark contrast to the trend among food retailers in recent years to retreat from markets where they lack scale and brand recognition. The pioneering strategy, industry observers

INDIANAPOLIS -- Marsh Supermarkets' expansion from Indiana to Illinois represents a left turn in more ways than one.

When the newest Marsh location opens next week in the Chicago suburb of Naperville, Ill., it will stand in stark contrast to the trend among food retailers in recent years to retreat from markets where they lack scale and brand recognition. The pioneering strategy, industry observers say, will test old-fashioned organic expansion, the strength of a newfangled store offering, and ultimately, Marsh's resourcefulness in making it all work on a tight budget.

While Marsh executives are optimistic about success in Chicago, some industry observers contacted by SN characterized the plan as a gamble sparked by difficult conditions in Indianapolis.

Marsh operates 105 of its 118 stores in Indiana, which in recent years has seen extensive supercenter expansion from Meijer and Wal-Mart, and competition from conventional players such as Kroger, which combined with slow overall growth has brought price, margin and market share pressures on Marsh. Earnings have decreased in consecutive quarters based on year-ago figures, and comparable-store sales during the fiscal year that ended April 2, excluding gasoline, rose by less than 1%.

Format and merchandising innovations such as the uniquely designed "lifestyle" store -- the fourth of which is scheduled to debut in Naperville next week -- have done only so much, observers say.

"Marsh has done an admirable job trying to grow and defend its market. But it's not a market that's growing, and it's facing a ton of competition," Neil Stern, senior partner, McMillan/Doolittle, Chicago, told SN. "At some point, you have to look at other markets as a means for growth and one that's similar demographically to the ones you've had success with. Whether that's a market as big as -- or competitive as, or as far away as -- Chicago remains to be seen."

Don E. Marsh, Marsh's chairman and chief executive officer, was not available last week to comment on the market expansion. When Marsh first announced it would look to Chicago in 2003, he said: "We need new territory. We will not be cannibalizing ourselves here in Indianapolis."

By choosing Naperville specifically, Marsh has found a community with attractive demographics and rapid growth. According to census figures cited by the Naperville Convention & Visitors Bureau, the city's population in 2002 was 133,000 and projected to be 155,000 in 2010, making it among the fastest-growing communities in the country. Median family income in 1999 was $88,700 and exceeds $100,000 today, observers said.

The 66,000-square-foot store will be located at a former Kmart site that was under construction but abandoned when that retailer declared bankruptcy. Like the other three lifestyle locations, the store features a "racetrack" layout featuring a central courtyard with a coffee bar, surrounded by perimeter rooms highlighting various departments.

Marsh's Naperville competition includes established conventional players like Jewel-Osco and Dominick's, with alternative formats like Whole Foods and Meijer also taking aim at the area. According to Stern, both Albertsons-owned Jewel and Safeway-owned Dominick's operate four stores each in Naperville; Meijer, the supercenter operator based in Grand Rapids, Mich., surrounds the area with stores in Aurora and Bollingbrook and is adding a store in nearby Plainfield; and natural foods retailer Whole Foods, Austin, Texas, has locations nearby. Niche independents like Bobak's and Caputo's Fresh Markets also have Naperville locations.

"The challenge for Marsh is whether it can bring something to the consumer that's not being given to them now," Stern said. "The new prototype they will open certainly looks different and feels different. But will it be enough? Is it going to be that much better than anyone else?"

David Livingston, an industry consultant based in Pewaukee, Wis., is skeptical.

"I think Marsh has a good idea, but I don't expect the competition will lay there and play dead for them. You have a lot of others trying to capture the high end, and it's going to be very difficult getting any kind of recognition in that marketplace. They're having a tough time now in Indiana," Livingston said, adding that studies he'd done indicate the company runs less productive stores, based on sales per square foot, than competitors there.

Others believe Naperville can be the right match for Marsh, citing area residents' shifting shopping patterns since the 2003 bankruptcy of Eagle Food Centers; union struggles besetting Dominick's; and a lack of competition from Wal-Mart Stores, Bentonville, Ark., whose supercenter concept hasn't yet penetrated Chicago or its close-in suburbs. "It will be a much more accommodating market than Indianapolis," said Burt P. Flickinger III, managing director, Strategic Resource Group, New York. "That area has the highest going-in margins in the country, so there's a lot of room for profit."

Nick Peters, senior vice president with CB Richard Ellis, Oak Brook, Ill., said the site Marsh is taking is well-located along Route 59, with proximity to the Westfield Fox Run regional mall that may offer the store a wide drawing range.

Jodi Marsh, a spokeswoman for the chain, declined comment to SN about how the company intends to promote itself upon arrival. A press release issued last week said grand-opening festivities would include contests, giveaways, in-store sampling and appearances by winemakers.

Sustained growth in Chicago will take additional locations, observers said, saying distribution, advertising and other expenses are best spent among several stores. Earlier this month, Don Marsh said the company is continuing to look for additional locations in the area. "It is very, very expensive to run a single store out of your marketing area," Stern said. "Their goal has to be to concentrate more stores in the Chicago market."

There's also a question of how much Marsh can afford to put behind a start-up operation. Don Marsh noted earlier this month that the retailer intends to implement cost reductions in light of quarterly earnings that he said "were not up to expectations." In a recent financial filing, Marsh noted it has been focused on cost reductions for more than two years, and that it had drawn $75 million of an $82.5 million credit facility that matures in February. The company believes it will be able to secure an extension or other financing prior to the credit facility's maturity date.

"This company has a lot of balls up in the air in terms of the number of businesses they are in," one observer said. "If you look at their margin trends and the money they've invested in the business, the return on investments is very low."